PMIs appear to have over reacted to 'Brexit'

Ian Kernohan

1 September 2016

UK Purchasing Managers’ Index (PMI) manufacturing survey data has bounced back in August from a very weak July reading.

The manufacturing sector accounts for quite a small share of GDP and should be doing well anyway on weaker sterling, but this is the first sign that the July move in PMIs was an over-reaction to the Brexit vote (we’ve seen similar over reactions in the past, notably 9/11 and the Iraq war).

We are awaiting PMI services (which is a much larger sector) on Monday, but even if we see a similar bounce here, it shouldn’t affect Bank of England (BOE) intentions, as they had already cast doubt on the big fall in PMIs.

We remain bearish on Cable as the gap between BOE and US Federal Reserve (Fed) policy widens: BOE is easing policy while the Fed looks set to tighten, potentially as soon as this month.

Assuming we see a bounce in PMI services, we will alter our H2 16 GDP view from a small negative to a small positive. Beyond that however, we still think Brexit negotiations will create a headwind of uncertainty (especially in financial services) and so expect monetary policy to remain very easy. At this stage, we have no idea whether the UK will have access to the Single European Market and on what terms – which is no small matter.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.